11. Industry

This sector includes all industrial activity and manufacturing
in Scotland, including the energy-intensive industrial sectors
covered by the
EU Emissions Trading
System.

11.1 Where we are now

11.1.1 The industry sector has seen a 10.6
M
tCO
2e (50.5 %) fall in emissions
between 1990 and 2014. Much of this decrease occurred between 1990
and 2000 - linked to a decline in emissions from manufacturing and
the iron and steel industry over this time period. There has been a
further smaller decrease between 2008 and 2009, coinciding with the
recession. Figures have then been more level in recent years,
albeit with small fluctuations in emissions from this sector since
2009. There was another decrease (0.8
MtCO
2e; 7.3 %) in emissions in this sector between
2013 and 2014. This has been driven by a number of factors, which
include a reduction in emissions from combustion in the
petrochemicals industry, and from the space heating of offices,
which is partly linked to external temperatures. There was also a
smaller drop in emissions from pulp and paper making.

Figure 17: Industry historical emissions

11.2 Our ambition

Figure 18: Industry carbon envelopes

11.2.1 Scotland's industrial sector has already delivered
substantial emissions reduction. The Scottish Government wants to
ensure that further decarbonisation between 2017-2032 will be
achieved by supporting industry to make the investments in measures
that will enhance its productivity, improve its competitiveness,
and realise new manufacturing opportunities in global markets. Set
in that productivity and growth context, there are two key policy
outcomes that the Scottish Government wants to see for industry
under this Climate Change Plan:

Industrial emissions fall by around 19% between 2014 and
2032, through a combination of fuel diversification, cost saving
energy efficiency and heat recovery and participation in
EU carbon markets. This
will mean by 2032, industrial emissions will be in total, 60%
lower than 1990.

Technologies critical to further emissions reduction are
demonstrated at commercial scale by 2030.

11.2.2 We will work with businesses and others to achieve these
outcomes through two principal means:

1) By ensuring a continued level playing field for
regulation through
EU and
UK frameworks for
industrial decarbonisation

11.2.3 The regulatory environment is underpinned by existing and
planned
EU and
UK regulatory frameworks
- the
EU Emissions Trading
System Phase III (2014-2020) and Phase IV (2021-30), and
UK carbon taxes and
related reliefs (e.g. Climate Change Levy, Climate Change
Agreements, Energy Intensive Industries package)
[64]. These regulatory frameworks ensure continuing access to the
level-playing field for industry across the
UK and
EU, and support
investment in the industrial decarbonisation pathways necessary to
meet the
EU and
UK's contributions to the
Paris Agreement, including continued access where required to free
allocation of allowances for those sectors at risk of international
carbon leakage
[65]. The Committee on Climate Change has already confirmed that
it expects that "available rules for future phases of the
EUETS will imply
a reduction in Scottish net emissions in these sectors of 34% from
2013 to 2030"
[66]. The
ETS cap will
therefore make a major contribution to the 19% emissions reduction
envelope for industry from 2014 to 2032
[67].

At the
EU level:
1. By 2020 - Industrial Emissions covered by the
EU Emissions Trading
System cap will be 21% below 2005 levels, consistent with the
EU's 2020 emissions
reduction target and commitment to the Kyoto Protocol second
period.
2. By 2030 - Industrial Emissions covered by the
EU Emissions Trading
System cap will be 43% below 2005 levels, consistent with the
EU's 2030 emissions
reduction target and commitment to the Paris Agreement.
3. By 2050 - Industrial Emissions, covered by the
EU Emissions Trading
System cap would be 90% below 2005 levels, which would be
consistent with the
EU's 2050 emissions
reduction target.

11.2.4 These programmes use a combination of existing support
from the Scottish Government, Scottish Enterprise, Highlands and
Islands Enterprise (and their partners), and will develop new
financial products for industry to invest in energy efficiency and
decarbonisation through approaches such as industrial heat recovery
to district heating networks. This policy framework builds on the
existing
ESOS
(Energy Savings Opportunity Scheme) audits which set out
cost-effective energy efficiency and decarbonisation measures that
will save industry money, maximising substantial economic
opportunities through improved productivity. The policy on
'Delivery of our suite of waste reduction, recycling and
landfill diversion targets and regulation up to 2025', in the
waste chapter of this Climate Change Plan, summarises our approach
to delivering those targets. Our circular economy strategy, Making
Things Last' sets out our ambitions and priorities to keep products
and materials in high value use for as long as possible, reducing
waste and carbon emissions and delivering economic benefits through
improving productivity, opening up new markets and improving
resilience. This includes achieving a 70% recycling rate by 2025 -
increasing the supply of recycled materials on the market which,
when used by industry in place of virgin materials, will also
provide significant 'upstream' energy efficiency savings for
Scottish industry.

11.3 Policy outcomes, policies, development milestones and
proposals

11.3.1 There are two policy outcomes for industry.

Policy outcome 1: Industrial emissions fall by
around 19% between 2014 and 2032, through a combination of fuel
diversification, energy efficiency and heat recovery and
participation in
EU carbon markets.

There are four policies and three policy development milestones
which will contribute to the delivery of policy outcome 1.

Policies which contribute to the delivery of policy outcome
1

1)
EU Emissions Trading
System (
EUETS) cap
delivers a 43% reduction on 2005
EU emissions levels by
2030 and we will argue for a share of that cap in line with meeting
Scotland's domestic ambitions.

Policy outcome 2: Technologies critical to further
industrial emissions reduction (such as carbon capture and storage,
carbon capture and utilisation, and production and injection of
hydrogen into the gas grid) are demonstrated at commercial scale by
2030.

There is one proposal which will contribute to the delivery of
policy outcome 2.

11.3.2 Full details of policies, policy development milestones
and proposals are set out in the tables below. The delivery of
these will be tracked through the monitoring framework (see
section
6).

11.4 Wider impacts

Co-benefits to be realised

11.4.1 There are potential co-benefits for business
competitiveness and energy productivity of investment in industrial
energy efficiency, which reduces operating costs and can protect
against any rise in energy prices, and industrial heat recovery,
which could provide an income stream. These enhancements in the
competitiveness and productivity of Scotland's manufacturing sector
will complement wider investment in innovation and skills to
contribute to the Government's wider objectives of sustainable
economic growth, and will ensure that high quality manufacturing
jobs continue to be located in Scotland, benefiting all people
across Scotland, in both urban and rural areas.

11.4.2 Demonstration at commercial scale of industrial emissions
reduction technologies such as
CCS or
hydrogen would protect Scottish business against future carbon
price rises. It could also secure economic benefit in the supply
chain for knowledge transfer of technology expertise to other
businesses in international markets. In addition, support for
industrial clustering will help businesses to reduce costs through
shared infrastructure such as district heating networks and through
co-location of production processes and where industry is currently
a producer of waste heat deployment of district heating creates new
revenue streams to help competitiveness of the business.

11.4.3 The Scottish Government will maximise these co-benefits
through working with our public sector partners and industrial
trade associations to support the investment necessary for these
improvements in energy efficiency and productivity through our
manufacturing action plan (
MAP)
A Manufacturing Future for Scotland, and through
SEEP,
which will deliver our national infrastructure priority for energy
efficiency.

Adverse side effects to be managed

11.4.4 Reducing global emissions to a level consistent with the
Paris Agreement will require a significant reduction in the carbon
intensity of the global economy - and comparative effort from other
major economies. The pathway set out in this Plan is broadly
consistent with the level of emissions reduction expected in the
EUETS cap out to
2030, and with the
EU's contribution to the
Paris Agreement. By remaining within
EU and
UK regulatory frameworks,
we ensure that industry in Scotland retains the
EU-wide and
UK-wide level playing
fields for emissions reduction, which avoids the risk of 'carbon
leakage'. This is where business relocates from one country to
another where there is more liberal emissions control. The net
effect is to leave global emissions unchanged whilst damaging the
economy of the country from which industry relocated.

11.4.5 Provisions to protect sectors at greatest risk of carbon
leakage are included within the
EUETS, and hence
this is why it remains our major regulatory instrument for tackling
industrial emissions in the fairest way possible, as part of
collective effort with our
EU partners. Those
working in the manufacturing sector would be at severe risk if
industries were to close or relocate from Scotland as a result of
carbon leakage. Energy intensive businesses, that were not required
to make similar emissions reductions in other locations outside
Scotland, would potentially see Scotland as an unattractive
location for new investment in manufacturing.

11.4.6 To help businesses decarbonise within the
EUETS cap and
under
UK carbon taxes, we will
support investment in energy efficiency and heat recovery, and also
support business in accessing
EU funding necessary for
demonstration of significant technologies, such as
CCS or
hydrogen, that can drive further decarbonisation of manufacturing
beyond the 2020s.

11.5 Summary of policies, development milestones and
proposals

Policy outcome 1: Industrial emissions fall by around 19%
between 2014 and 2032, through a combination of fuel
diversification, energy efficiency and heat recovery and
participation in
EU carbon
markets.

EU Emissions
Trading System (
EUETS)
cap delivers 43% reduction on 2005
EU emissions
levels by 2030 and we will argue for a share of that cap in
line with meeting Scotland's domestic ambitions

EU

SEPA

Scottish Government

UK Government

Welsh Government

Northern Ireland Executive

Environment Agency

The
EUETS
will continue to cover energy intensive industries from
present to 2030 under proposed
ETS
Phase IV, (steel, cement, paper, chemicals, glass,
ceramics, refining etc), with a steeper annual linear
reduction factor (from 1.74% p.a. in 2013-20 to 2.2% p.a.
in 2021-30). Many of these sectors will still benefit from
high levels of free allocation of allowances in order to
protect them from carbon leakage risk and to avoid
decarbonisation by deindustrialisation in the absence of
any comparative effort from other major economies under the
Paris Agreement. Delivery of the
EUETS in
Scotland will continue to be a partnership between the
Scottish and
UK Governments,
and the other devolved administrations, with
SEPA
as the major enforcement body
[68].

Carbon taxation is a reserved matter, and the
UK Government has
set out that it will concentrate its carbon taxation in a
single instrument (
CCL) from
2019 onwards, with a stated intention that it will
rebalance rates, working towards a ratio of 1:1
(electricity: gas) by 2025 (from the current 2.9:1 ratio
where electricity contributes almost 3 times as much to the
CCL tax take
as gas). The
UK government has
said that it intends that this will more strongly
incentivise reductions in use of gas by business, in
support of
UK climate change
targets. For those sectors that benefit from a Climate
Change Agreement, in return for a commitment to reduce
energy use and carbon dioxide emissions, operators receive
a discount on the
CCL of 90%
on electricity bills, and 65% on other fuels.
CCAs
are available for a wide range of industry sectors from
major energy-intensive processes such as chemicals, paper
and supermarkets to agricultural businesses such as
intensive pig and poultry farming.

The Renewable Heat Incentive is a
UK-wide scheme
created by the
UK Government
(with the agreement of the Scottish Government). The
non-domestic scheme helps businesses, public sector and
non-profit organisations meet the cost of installing
renewable heat technologies such as biomass, heat pumps
(ground source, water source and air source), deep
geothermal, solar thermal collectors, biomethane and
biogas, combined heat and power (
CHP)
systems. Payments are made over 20 years and are based on
the heat output of the system. There is no commitment to
funding the
RHI
beyond 2020/21 and during the development of
SEEP
we will consider what sort of funding mechanisms are needed
into the 2020s and 2030s to enable continued take-up of
these technologies by business.

The manufacturing action plan (
MAP)
A Manufacturing Future for Scotland, commits the
Scottish Government and its partners to a programme of
activity to support industrial energy efficiency and
decarbonisation:

Advice and support: Develop expert advice for
Scotland's energy intensive companies to develop feasible
and cost effective business plans to implement
ESOS
(Energy Savings Opportunities Scheme) audit
recommendations. This may include support to achieve
ISO
50001.

Energy efficiency and heat recovery: As part of the
new energy efficiency national infrastructure priority,
consider how to best incentivise additional energy
efficiency and heat recovery opportunities within
businesses.

Work with the
UK Government
to develop new incentive or regulatory mechanisms to
deliver this.

Benchmarking performance: Establish a more detailed
baseline of Scottish industrial energy, heat and
emissions performance, to benchmark against
EU
standards.

The Programme for Government commits the Scottish
Government to significant policy development on heat and
energy efficiency improvements in all buildings across
Scotland through the national infrastructure priority.
Scotland's Energy Efficiency Programme will improve the
energy efficiency and reduce the environmental impact of
Scotland's domestic and non-domestic buildings through a
programme of measures including: regulation, financial
Incentives, advice and support. This will enable building
owners and tenants to make extensive fabric improvements
e.g. loft and wall insulation and investment in
decarbonisation of their heat supply such as through
expansion of and connection to district heating,
installation of heat pumps, biomass boilers, or repurposing
of the gas grid for new technologies such as hydrogen or
biogas, where feasible. For industrial buildings, this
could include support for investment in industrial energy
efficiency in processes and equipment, and industrial heat
recovery to district heating networks through a combination
of: potential development of new financial products for
industry to invest in energy efficiency, heat recovery, and
decarbonisation; alongside support, where eligible or
available, via existing financial mechanisms of Scottish
Ministers and Scottish Enterprise. We will consult on
regulation of district heating alongside development of the
Energy Strategy, in January 2017, in response to the
recommendations of the Expert Commission on District
Heating Regulation in 2016, which includes recommendations
on regulation of industrial heat recovery.
SEEP
is currently under development and consultation, and once
this is complete, it will offer the range of policies
necessary to improve the energy efficiency and decarbonise
the heat supply of non-domestic buildings.

Existing
ESOS
audits set out cost-effective energy efficiency and
decarbonisation measures that will save industry money and
improve productivity. The manufacturing action plan (
MAP)
A Manufacturing Future for Scotland, commits
Scottish Enterprise and
HIE to
build on the existing pilot of follow-up to audits, with
the roll-out of a Scotland-wide programme of targeted
advice to industry, to offer relevant investment support
and access to finance through existing funds or new funds
developed under
SEEP.
Further development could include consideration of the
potential to require mandatory implementation of
ESOS
audit findings where they are demonstrated to be
cost-effective and save industry money and improve
productivity, if this is within devolved competence.
Stakeholder engagement would be undertaken to inform any
further development of the
ESOS
scheme.

EU-
ETS
beyond 2030

Figures for Phase V of the
ETS
(post-2030), covering the Scottish carbon budget to 2032
are not available, since the
EU's contribution
to the Paris Agreement is currently only set out to 2030.
We can expect further tightening of the
ETS cap
beyond 2030 to meet the
EU's 2050 target
of 80% emissions reduction, and the European Commission has
said that under the
ETS
continuing, by 2050, emissions would be reduced by around
90% compared to 2005 levels - though this is subject to
further provision in
EU law to extend
the
ETS
beyond 2030
[69].

Policy outcome 2: Technologies critical to further
industrial emissions reduction (such as carbon capture and storage,
carbon capture and utilisation, and production and injection of
hydrogen into the gas grid) are demonstrated at commercial scale by
2030.

Table 11-3: Proposals which contribute to the delivery of
policy outcome 2

The
MAP
commits the Scottish Government and its partners to explore
the scope for supporting and accessing finance for
cross-sector technology demonstration projects identified
in
UK industrial
decarbonisation roadmaps. This includes carbon capture and
storage, heat electrification and the diversification of
fuel supplies and feedstocks to new sources such as
hydrogen. This includes support for industrial
decarbonisation technology demonstration under the proposed
EUETS
Innovation Fund which is expected to operate from 2020 to
2030.
MAP
partners will work with energy intensive businesses and
trade associations to develop potential demonstration
projects in Scotland.

Table 11-4: Policy outcome 2 over time

Policy outcome 2

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Industrial emissions fall by around 19% between 2014 and
2032

7%

19%

19%

Technologies critical to further industrial emissions
reduction (such as carbon capture and storage, carbon
capture and utilisation, and production and injection of
hydrogen into the gas grid) are demonstrated at commercial
scale by 2030

ETS
Innovation Fund becomes available for application by
industrial sectors for demonstration of industrial
emissions reduction technologies at commercial scale

Industrial
CCS
is proven at commercial scale in the
EU and adoption
begins, driven by
EU carbon price
and level of free allocation under Phase IV.

11.6 Progress since
RPP2

Table 11-5: Progress on
RPP2
policies

RPP2
Policies

Summary of progress

Renewable Heat incentive (
RHI -
Non Domestic

The Renewable Heat Incentive is a
UK-wide scheme
created by the
UK Government
(with the agreement of the Scottish Government). The
non-domestic scheme helps businesses, public sector and
non-profit organisations meet the cost of installing
renewable heat technologies such as biomass, heat pumps
(ground source, water source and air source), deep
geothermal, solar thermal collectors, biomethane and
biogas, combined heat and power (
CHP)
systems. Payments are made over 20 years and are based on
the heat output of the system. There is no commitment from
UK Government to
funding the
RHI
beyond 2020/21 and during the development of
SEEP
we will consider what sort of funding mechanisms are needed
into the 2020s and 2030s to enable continued take-up of
these technologies.

Table 11-6: Progress on
RPP2
proposals

RPP2
Proposals

Summary of progress

Low Carbon Heat (Non Domestic)

The Scottish Government published the Heat Policy
Statement in June 2015, setting out our heat hierarchy and
the actions and policies we are taking to reduce demand for
heat and ensure its decarbonisation. The development of
SEEP
will continue to deliver the actions set out in the
HPS,
alongside development of the new Energy Strategy, including
ongoing support for the Heat Network Partnership and
funding for district heating via the District Heating Loans
Fund. We will consult on the regulation of district heating
during 2017 as part of the wider consultation on the Energy
Strategy, and this will include consultation on industrial
heat recovery.